A colleague asked me today what amount of money I would need to earn each year in order to feel like I was wealthy. However, I am not sure that for me, that is the right way to frame the question, because if I am earning it as a salary (which is what he meant), the amount required would need to be substantially higher, because it is unsecured.
The average salary in Finland is 45,000€, but that really doesn't cover that much. It is possible to live an average life of course, but using my age as an example, I would need to be able to ensure that I can earn that for the next 25 years until retirement and, it doesn't provide a very good retirement package. However, if I was for instance earning €90,000 a year, that would provide a better life and a better retirement package, but it would still be far from wealthy, and still reliant on being able to maintain that "double average" until retirement. Again, there are no guarantees.
There are no guarantees. Ever.
However, investing is essentially risk mitigation, even though most see it as a risk position. For instance, if I was earning that 90K figure and was able to live on a 45K lifestyle for a decade, investing the rest, I would have essentially invested €500,000 capital in that time. Assuming sound investments and a modest gain of 5% a year, it would mean that I would have around a 750K portfolio.
However, what that 750K offers at 5% would be around 37K in investment growth a year, if I don't add anything else to it. That means that if I did lose my "double average" (assuming all things equal for ease of calculations) job after a decade, I would need a slightly better than average job at around 55K to keep my 90K income. But if you remember, I was living on a 45K salary and investing half, so essentially, I would only need a job that gives about 30K to keep the same lifestyle, investing nothing more. And, I would still of course have the 750K capital still sitting there.
Obviously, I haven't factored in the tax calculations, but that actually works in favor of the investments, because for instance, on the 90K it would be about a third in tax, so it would mean that it is actually living off 30K and investing 30K. 30K invested a year would amount to about 450K in capital. That capital at 5% would return about 22K with 15% tax exempt and 30% paid on the rest, leaving about 12K in earning after tax. S but capital gains has a lower tax rate, so it would mean the job that I would need to maintain my lifestyle at 30K and have 450K in capital, is still about a 30K job.
There are a lot of assumptions in this, but I think a lot of people psychologically frame wealth incorrectly, as they see it as what someone earns. However, that is a projected income, not a reality. Wealth has to be what we currently hold, so for me to be "wealthy" I would have to have enough invested that I could rely on it to bring me an income, without needing to rely heavily on the work I do.
So, for me as a slightly above average earner currently, I would need to have something like a million in capital investments working for me, while I am working my current job, because that would allow me to cover my salary, should I lose my job and can't find another. However, what I would want to be able to do is keep earning and adding to the capital investment, so that I don't run the risk of eating into it. So, if I was able to cover my salary and have a job that allowed me to keep adding 15K into the investment (a well below average job), that would mean that after another decade, the capital investment would have shifted to a value of 1.8M.
Let's say it is at that point I am able to retire, I would have some kind of pension from my working life, but on top of that, my capital investments would be returning 90K of capital earnings, whilst still keeping the capital intact. At near 70, I would have hopefully already paid off my house, own my car and have few overheads. That 90K after tax would be around 60K plus pension, so it would still be earning over the average salary.
I think that would be wealthy.
When we are able to work and increase our investments, but not have to work to increase the investments. Most of us will probably not get there, which is because most of us will never be wealthy. But, understanding this position means that we could at least recognize that getting a better salary doesn't make us wealthy without investing into having capital that works for us.
No matter what we are earning, if we are living hand to mouth, we aren't wealthy and the only way to be wealthy, is to multiply our current earning through investments into the future. As what we invest compounds, it means that putting a euro into an investment today at 5% yearly gain, will mean we will have doubled that euro in about 14 years. However, with a little thought and a bit of luck, it won't be earning 5%, it will be earning 10%, cutting that down to 7 years and beating (hopefully) the average inflation.
The numbers don't matter much as they have to be applied locally, but at least for me, "wealth" seems a long way off. However, it is all about being able to multiply the value of the work done now, so there is a chance that the additional work I do in crypto on top of my salary, will earn significantly more than 5% and if things go really well, having a million dollars invested will be irrelevant, because I will have a few hundred thousand HIVE, a bit of bitcoin, some Eth or whatever invested - and that will be good enough - if not better.
If wealth is about being able to have the option to do what we want with our lives,
How many are truly wealthy?
Taraz
[ Gen1: Hive ]